Explain what is meant by the “relevant range” in the context of Cost Volume Profit analysis

Question

Explain what is meant by the “relevant range” in the context of Cost Volume Profit analysis

Answer 1

The relevant range is the number of units that can be produced/sold/used under normal circumstances. For example, if you are having a cookout, you'll need to figure out how much food to buy. Instead of taking individual orders from each friend and family member, you can just use relevant range. If ten folks will be there, and each person will eat one or two hamburgers, then you'll need to buy between 10 and 20 hamburgers in order to feed everyone. You'll still have to decide exactly how many to buy, but anything outside of that range is pointless to even consider. (If you buy less than 10 hamburgers, not everyone will get to eat, but if you buy more than 20, you will have wasted money because they won't all be eaten.)

 

This information becomes much more valuable on a larger scale. If a business produces too much of a product, it can affect employment, future sales, and overall profitability. Low productivity can also negatively impact a business by forcing potential buyers to go to a competitor in order to get the product. A company must have enough to meet demand, but not too much as to overwhelm supply. 

 

In order to decide how much to produce, companies use relevant range statistics. Relevant range also determines the price of products, as you can estimate how many units will sell compared to how much it will cost to produce those units. Buyers use relevant range as well, when they figure how many units will need to be purchased to meet their needs.